By Robert M. Cutler
MONTREAL - Western energy majors in Kazakhstan's offshore Kashagan oil development project in the northern Caspian Sea have asked the government in Astana to raise the budget for the first phase of the project by 22%, due to delays and cost overruns.
The new figure, at $46 billion, compares with the current first-phase cost estimate of $38.4 billion and is nearly double the original estimate of $24 billion.
Formidable technical obstacles have delayed the development timetable. Temperature extremes range from -30 to +40 Celsius (-25 to +100 Fahrenheit), and the shallow waters no more than a few meters deep freeze over on average for at least four months every year. The oil deposit itself is nevertheless rather deep and under very high pressure, capped by a dome of natural gas that in turn is overlain by a salt dome.
The high sulfur content, estimated at 16-20%, must be treated and removed so as not to corrode pipelines. Finally, in addition to provisions for ecological conversation, Kazakhstan's law forbids that the gas be flared; any quantities not re-injected must be siphoned for domestic consumption.
The consortium's international partners would themselves bear the cost during the development period, but would be reimbursed for it later in kind with barrels of oil after output begins. They have already invested $33 billion anticipating such recompense.
As much as one-fifth of that total may, however, be contested by the government and in the long run not reimbursed, Bloomberg News reported, citing an unidentified informant in Kazakhstan's Oil and Gas Ministry. The project's full development costs are estimated at $187 billion, but this figure is likely also to increase further.....
The Italian firm Eni, US-based ExxonMobil, the Anglo-Dutch Shell, and Total of France all hold stakes of 16.66% in the consortium. BG Group was a member of the consortium until 2004, when it sold its share. ConocoPhillips and Inpex have smaller stakes, while Kazakhstan's KazMunaiGaz (KMG), which was entirely absent from the original KazakhstanCaspiiShelf (KCS) consortium formed in 1993, holds a plurality stake of 16.81.
BP and Statoil sold their stake in the project to its other partners in 2001. The KCS morphed as from 1997 into the Offshore Kazakhstan International Operating Co, operated by the Eni-led AgipKCO joint venture.
A further restructuring of the development consortium at the end of the last decade, which helped to resolve taxation questions under Kazakhstani law that had come to plague the Western partners, gave KMG a more central managerial oversight role.
That restructuring created the North Caspian Sea Production Sharing Agreement, now managed by the newly created North Caspian Operating Co (NCOC). Astana's intent in promoting the restructuring was also to improve information transparency. KMG now assures the functioning NCOC's permanent secretariat as the titular operating responsibility rotates among the Western partners.
Discovered in 2000, the field's start-up production date was first set for 2005, then postponed to 2008, and then again to 2010, and yet again to 2014. Smaller-scale so-called "industrial" production is scheduled to begin by the end of this year, but even that schedule appears now to be in doubt, as some reports suggest this may not occur until the second half of 2013.
Under the current schedule, sure to be modified, "experimental" production, that is, up to 370,000-450,000 barrels per day (bpd), would not end until 2014, when "commercial" production would begin, gradually doubling until 2018-2019, when second-phase development is projected to start. An eventual production rhythm of 1.5 million bpd is later planned sometime in the 2020s. However, it is likely that output will not commence until the second half of next year at the earliest, rather than at the end of 2012 as foreseen earlier.
As things stand, therefore, the initial "experimental" phase may not end until 2016, as it will at first produce only 75,000 bpd and according to the US Energy Information Administration will ramp up only at an annual rate of 125,000 bpd. The deposit is estimated to have 7-9 billion recoverable barrels of oil (some estimates range up to 12-13 billion) out of 38 billion total reserves.
It is the largest known oil field outside the Middle East, the fifth-largest in the world in terms of reserves, and the largest discovered since the Prudhoe Bay (Alaska) strike confirmed in 1968.
The repeated delays in the development of the offshore Kashagan deposit together with continuing unexpected increases in the level of sunk costs may eventually raise the question of the very profitability of the project, at least in the eyes of the Western investors.
Their contract for exploitation of Kashagan's resources expires in 2041, and although they have made noises about seeking an extension of that date in order to recoup unforeseen expenses, the Kazakhstani government has so far given no indication of any sympathy to such a request.